The GoldStandard blog by Anantha Nageshwaran has 4 posts on truth/state of Indian economy. In the process, he links to several articles/pieces on Indian economy (which is also the trademark of his blog).

What is also interesting to note is how quickly the narrative changes. All this while, we were saying things are stable in Indian economy and so on. Demon is a blip. GST is a blip etc etc.

Now, one is reading quite a few pieces on the need to pass fiscal stimulus to shore Indian economy! For instance see this, this and this. Once the government bites the fiscal bullet and things go haywire (as they usually do with most governments), the same articles will start criticising the Government! Some will say eased too much, some will say too soon and some will suggest that instead of easing this component, that component should have eased..

Like this:

I just wrote y’day about how much Bundesbank matters to ECB policy and yet no German central banker is primed for the top job at ECB.

Least did I realise that year 2017 happens to be 60th anniversary of Bundesbank. Jens Weidmann, the chief of the central bank pays tribute and shares some fascinating history:

The Bundesbank first saw the light of the world on 4 July 1957, the day on which Germany’s Bundestag adopted the Bundesbank Act – alongside the Antitrust Act. Writing at the time, the Frankfurter Allgemeine Zeitung newspaper remarked that this day had witnessed “the adoption of two crucially important pieces of basic legislation for our entire economic system”.

When the Bundesbank Act came into force on 1 August 1957, the Bank deutscher Länder, the Land Central Banks and the Berlin Central Bank were merged to form a single institution, the Deutsche Bundesbank.

This new institution took over the headquarters of the Bank deutscher Länder in Frankfurt am Main. I wonder if you are aware that it almost ended up being based in Hamburg. Back then, the British forces were pushing for the Bank deutscher Länder to make Hamburg its home. But as it turned out, the Americans got their way, and the institution was established in their preferred location of Frankfurt, inside the US occupation zone.

That marked a major turning point for Frankfurt. The city evolved into Germany’s financial centre and later also succeeded in attracting the European Central Bank. But I don’t think Hamburg lost out in any way – Hamburg is an appealing, vibrant and economically successful location as it is.

He says though location of Frankfurt has little to do with Bundesbank’s success:

One thing I am quite certain about is that the choice of location did not influence the Bundesbank’s success, which I think can be put down to three key factors:

Its narrow mandate to preserve price stability,

Its independence, which allows it to pursue this objective even against political influence, if need be, and

An appreciation of the need for stability throughout much of the German population, which gave the Bundesbank the popular backing it needed to pursue its monetary policy objectives.

Ladies and gentlemen, the fundamental problem facing monetary policymakers is that they are caught in a conflict of objectives. In the short run, staving off inflation can sap economic momentum and drag on employment. On the other hand, the central bank can temporarily dampen unemployment if it tolerates a higher rate of inflation. This phenomenon is what economists call the Phillips curve relationship. It is a concept which crops up in a famous remark uttered by Helmut Schmidt in the early 1970s, when he once said that “I would rather have 5% inflation than 5% unemployment”.

An inverse relationship exists between inflation and joblessness because an unexpected increase in inflation pushes down real wages, lowers the price of labour, and thus tends to lead to a drop in unemployment.

But that only happens in the short run. Because employees will push for the higher rate of inflation to be offset, thus moving real wages and unemployment back to where they were before. There is a shift in the Phillips curve.

And if the unions, fearing a further increase in the rate of inflation, push through even higher wage increases, unemployment will rise as a result.

Let me use an everyday situation to shed more light on how this principle works. Imagine a person who is habitually late for work. Now, their partner might be able to outsmart them once by moving the hands of the kitchen clock forward by five minutes. But in the long run, that person will get used to the new time, so the clock will have to be put forward even more to prevent that person from leaving the house late in future.

That’s exactly how it is with monetary policy. If you fire up the printing presses to fend off unemployment, you will end up mired in high inflation and high unemployment.

He brings some episodes from German history which affirmed this fight for price stability:

Bearing that in mind, it was undoubtedly crucial that the Bundesbank, just like its predecessor, the Bank deutscher Länder, had independence from political control. Because German post-war history also bears witness to a number of situations in which the Bank was forced to head off political demands to loosen monetary policy.

One such situation that springs to mind is the famous “Gürzenich speech” which Konrad Adenauer delivered shortly before the Bundesbank was established. At that time, the Bank deutscher Länder had switched to a tight monetary policy stance because there was a risk that the brisk external demand might cause Germany’s economy to overheat. Konrad Adenauer, speaking in 1956 at Cologne’s Gürzenich Hall, warned that the tight policy would be “disastrous … for the man on the street”. A year later, the SPIEGEL magazine looked back at these events and wrote: “What is more, the credit constraints later turned out to be absolutely correct; they came just in time to prevent the boom from morphing into an inflationary economic gallop.”

Another situation I can think of occurred in the year 1979, when the government drummed up sentiment against an increase in the discount and Lombard rates. Manfred Lahnstein, State Secretary in the Federal Ministry of Finance, presented his critique before the Central Bank Council and then went public with his misgivings. He expressed concerns that the policy rate hikes might endanger the economic upswing. As it turned out, the German economy expanded at a real rate of 4½% in 1979, even though policy rates were increased. The Bundesbank, then, did well to prevent the global inflationary tendencies from spilling over into Germany more strongly than they did.

Because the Bundesbank held its ground in both these cases and refused to be knocked off course, the Die Welt newspaper once dubbed it in retrospect the “bulwark on the Main”.

That was praise indeed for the Bundesbank, of course. For it had resisted the political pressure not because it was indifferent to the macroeconomic prospects, but it firmly believed, even back then, that monetary stability is the best contribution a central bank can make in the long run towards high levels of employment and sustained economic growth.

He also adds that what is also central to this is people’s appreciation of merits of stable currency.

But I am convinced that the Bundesbank only prevailed in its skirmishes with politicians because it could count on the general public’s appreciation of the merits of a stable currency. This brings me to the third of the key factors in the Bank’s success which I mentioned earlier on. A policy strictly geared to stability only stands a chance of success if the general public is sufficiently aware of the merits of stability. That’s because, in the long run, it is not right for democratic states to have a monetary policy which runs counter to public opinion.

On this topic, Otmar Issing once said that each country gets the inflation it deserves.

This is mainly due to German hyperinflation of 1920s continue to remain etched in people’s memories…

Fiona Weber-Steinhaus has a moving piece on how a rare murder in Iceland is changing so many attitudes in the country.

Iceland mourned Brjansdottir’s loss. Many people used the slogan “I am Birna” while posting on social media about her death. Around 10,000 people marched in a vigil in her honour—a staggering number, given that Iceland’s population is less than 350,000. Both the country’s president and prime minister went to her funeral, which was held in Reykjavik’s main church. In the service, which I attended, a group of Brjansdottir’s friends carried her white coffin. A cameraman of the public broadcaster RUV cried while filming them.

The case of Brjansdottir’s killing has convulsed Iceland so intensely, in part, because of how rare such events are in the country. According to national police statistics, on average, 1.8 murders were committed annually in Iceland between 2000 and 2014—with some years, such as 2008, having none recorded at all. The nation is also one of the least martial in the world, with no standing army, and police officers who largely patrol unarmed. In response to Brjansdottir’s case, however, a wave of anxiety has swept Iceland, starting a public debate about, and perhaps even changing, the small country’s attitudes towards public safety.

One of the first issues up for debate was that of the safety of young women. In general, in Iceland, it is not considered dangerous for women to walk home alone in the early hours. It is even common for them to hitch rides with strangers via Skutlarar, an open Facebook group through which people offer rides in their cars to strangers travelling in the same direction as them. After Brjansdottir’s body was found, some women started a female-only Skutlarar group. When I visited Reykjavik in early February, many women told me that they would refrain from using the conventional Skutlarar in the future.

I met Gudrun Kristinsdottir, a 27-year-old engineering student, in the cafeteria of Reykjavik University. “This case is such a reality check,” she said. “We always thought, nothing happens here.” She now carries pepper spray in her handbag and said she would avoid walking home alone.

Seventeen-year-old Birta Mjöll works as a waitress in an upmarket restaurant. “My mother wants me to call her as soon as I sit in the car after work,” she told me, while polishing cutlery during her shift. “Everyone in Iceland knows the Geirfinnur case,” she added, referring to the mysterious disappearances of two men in Iceland, in 1974. “And now everyone knows Birna’s case.”

The second aspect of public debate focussed on the issue of CCTV surveillance. The footage of Brjansdottir had been too blurry to identify the car, and some argued that this indicated the need for a technical upgrade. In the January press conference, a journalist had asked Chief Superintendent Ásgeirsson: “Isn’t it clear that this security system downtown and here on Laugarvegur would have come to better use if it were in order? Don’t we need a better system?” Ásgeirsson affirmed the journalist’s point: “I can say that I would have liked clearer footage to work with.”

​Islamic banking is a relatively young but growing sector of the broader financial services industry. Numerous banks around the world offer Islamic, or Shari’ah compliant, financial products.

Some central banks offer Shari’ah compliant liquidity facilities to Islamic banks, affording them similar flexibility to other firms in managing their liquidity. Such facilities avoid the payment or receipt of interest, which is otherwise the most common basis for operating a liquidity facility.

The Bank is establishing a Shari’ah compliant facility, specifically a deposit facility to allow UK Islamic banks to hold central bank assets as part of their liquid assets buffer. This article explores the various ways in which this can be done, along with the model the Bank has chosen to adopt.

How religions have shaped all these banking and financing cultures and institutions..

The central bank is based in Germany and was designed as a replica of Bundesbank. Why? Because no other central bank had a reputation as the formidable German entity. So, if the European countries wanted to give up their mon policy to ECB, they said it better be like Bundesbank. Otherwise again we have a non-credible central bank creating all sorts of problems. Apart from the design, even the location was chosen as German as one always worried over political influence elsewhere. So much so both the central banks are located in Frankfurt within a 4 km distance.

Now, here comes the twist. Given strong German resemblance, one would impagine it is best to let German head the central bank. But no German has headed the central bank until today. Yes, one German has always been on the board but that is just about it. Earlier the German was a chief economist (Otmar Issing, Jurgen Stark). But even that is not the case today as Sabine Lautenschläger, who is a law person is on the board. Infact Axel Weber head of Bundesbank came close to being ECB chief but resigned from Bundesbank amidst lots of controversy.

So, the chief of ECB was first a Dutch, then a French and currently an Italian. They have kept Germany out as the fear remains that with a German not even little political maneuvering will be possible. With the non-German as a head, one can expect some sympathies in case of a slowdown.

This was tested during the current crisis. Both Weber and Stark did not favor any monetary stimulus by ECB and had runs with the ECB leadership leading to resignations. Post Stark, it became easy for Draghi to take control and convince others for monetary stimulus. However, Bundesbank under the new chief Weidmann continued to oppose the policies.

As Draghi’s term is ending in 2019, the speculations have started early. The Italians and French are again opposed to having Weidmann as President:

In its new edition, Germany’s Der Spiegel magazine reported Friday that Italy and France would object to installing Bundesbank chief Jens Weidmann as head of the European Central Bank after the end of Mario Draghi’s term in 2019.

It said government representatives from both nations had told German Finance Minister Wolfgang Schäuble that they had nothing against a German at the helm of the ECB, “but it must not be Jens Weidmann.”

The report elaborated that southern eurozone nations feared current pragmatic and flexible crisis management measures such as the ECB’s huge bond-buying program as carried out under Draghi would no longer be possible under Weidmann.

While Schäuble said in May he would not take part in any debate about Draghi’s successor, numerous media reports had highlighted his and German Chancellor Angela Merkel’s likely push for Weidmann to become the fourth guardian of the euro currency, after a representative from the Netherlands, France and Italy.

But there may be a whole bunch of contenders for the job of ECB president, among them Bank of France Governor Francois Villeroy de Galhau.

It cannot be taken for granted, though, that the fight for the post will include Jens Weidmann at all. A spokesman for the Bundesbank on Friday quoted him as saying he enjoyed his current job and would certainly stand ready for another term beginning May 2019, should he be asked to do so.

Weidmann has headed the German central bank since 2011.

Even if it is premature speculation, the European leaders will try hard to keep a German central banker heading the Board.

Like this:

Interesting paper by Sunil Mitra Kumar (King’s College London) and Ragupathy Venkatachalam of University of London.

They say caste discrimination does not play as big a role in bank lending (based on their data set):

In recent research, we examine the role of caste in rural bank lending (Kumar and Venkatachalam 2016). We are especially interested in examining whether banks discriminate on the basis of caste, and in understanding potential mechanisms behind any caste-based patterns in access to loans. Through these questions, we indirectly address a larger question concerning the effectiveness of affirmative action policies in the financial sector. In a departure from the literature on this issue, we study both the decision to apply for a bank loan, as well as whether that application is subsequently approved by the bank. In brief, we find that access to bank loans is stratified by caste, but that the major proportion of these differences is due to differences in loan application rates. However, we do find evidence of some discrimination against borrowers belonging to Scheduled Tribes (ST) when it comes to loan approvals.

……

Our finding that there is little discrimination – and none against SCs – is quite positive, even though the 5-7% lower approval rates for STs likely due to taste-based discrimination are a cause for some concern. But our finding that loan application rates differ significantly across caste groups in a way that mirrors their disadvantage is less positive. While we cannot say for sure, it suggests that historical disadvantage and possibly discrimination are still at play in shaping people’s expectations. It is possible that farmers who do not apply to banks find their credit from informal sources, but this is not encouraging either because such sources offer credit at very high rates. That said, a further set of results in the paper confirm that small farmers – those who own less than five acres of land and whom the RBI encourages lending to – have smaller inter-caste differences in application rates. This too is a positive finding because it suggests that this encouragement has trickled down to the level of expectations too, and has muted caste-based differences in application rates as a result. Caste and credit is not such a woeful tale per se, but more remains to be done.

These studies can hardly be generalized. An experiment in a different setting could show the opposite results..

In a potato field near the Netherlands’ border with Belgium, Dutch farmer Jacob van den Borne is seated in the cabin of an immense harvester before an instrument panel worthy of the starship Enterprise.

From his perch 10 feet above the ground, he’s monitoring two drones—a driverless tractor roaming the fields and a quadcopter in the air—that provide detailed readings on soil chemistry, water content, nutrients, and growth, measuring the progress of every plant down to the individual potato. Van den Borne’s production numbers testify to the power of this “precision farming,” as it’s known. The global average yield of potatoes per acre is about nine tons. Van den Borne’s fields reliably produce more than 20.

That copious output is made all the more remarkable by the other side of the balance sheet: inputs. Almost two decades ago, the Dutch made a national commitment to sustainable agriculture under the rallying cry “Twice as much food using half as many resources.” Since 2000, van den Borne and many of his fellow farmers have reduced dependence on water for key crops by as much as 90 percent. They’ve almost completely eliminated the use of chemical pesticides on plants in greenhouses, and since 2009 Dutch poultry and livestock producers have cut their use of antibiotics by as much as 60 percent.

Like this:

Interesting post by Prof George Selgin. Selgin counters view of a blogger who says that Free banking between 1867-1935 in Canada did not stabilize its GDP.

About a month ago, a Facebook post drew my attention to an attempt, by Casey Pender of Prague’s CEVRO Institute, to test my thesis that free banking contributes to NGDP stability using statistical evidence from Canada, which had a relatively free banking system between 1867, the year of Canada’s confederation, and 1935, when the Bank of Canada was established.

be able to show that Canada, from 1867-1935, had a more stable NGDP percent change from year to year than the U.S. And I thought this would be an easy and quick historical example that I could use to bolster my underlying theory. But things seem like they just ain’t so.

Instead, in comparing the fluctuations of Canadian and U.S. NGDP using data from the Macrohistory database, Pender found that Canadian NGDP was not less but more volatile. Moreover that conclusion held not just for the full 1870-1935 sample period, but also for the sub-period 1870-1914, which omits various extraordinary Canadian government interventions during WWI and the Great Depression.

Here is Pender’s chart showing his results from the full sample period:

Having now been made privy to these findings, I suppose that you are looking forward to seeing ol’ Doc Selgin eat humble pie. Well, you can quit holding your breath ’cause that won’t be happening anytime soon. In fact, for the moment at least, I remain thoroughly impenitent.

He says one must not just look at changes in NGDP but look at the relationship between those fluctuations and underlying changes in Canada’s monetary base. He shows that this relationship is much stronger in Canada than US…

In the end:

In brief, both our Canadian regression results themselves, and a comparison of those results with results using U.S. data, seem fully consistent with the theory that free banking helps to stabilize the relationship between NGDP and the monetary base.

Does that mean they confirm the theory? Alas, it doesn’t. Freedom in banking is but one of many differences between the pre-WWI Canadian system and its U.S. counterpart. Furthermore, even if Canada’s more stable NGDP-M0 relationship were in fact due to its having had a relatively free banking system, it wouldn’t follow that my theory is correct. Free banking could well have contributed to the stable relationship in question for reasons apart from the one my theory points to. We know, for example, that branch banking — itself an element of free banking — made Canada’s system less fragile, and therefore less vulnerable to financial crises, than the U.S. system. We also know that financial crises tend to involve a collapse in bank credit and spending. So the relative stability of the Canadian NGDP-M0 relationship, instead of reflecting a tendency for changes in M to offset opposite changes in V, may instead simply have reflected a relative lack of banking crises and associated increases in the ratio of bank reserves to bank credit. Although all this is still good news for fans of free banking, it leaves my particular hypothesis unproven.

In short, while my theory has yet to be discredited, it also has yet to be confirmed. I hope that either Mr. Pender or some other enterprising econometrician will eventually settle the matter, one way or the other.

Bernardo Figueiredo of RMIT University and Daiane Scaraboto of Universidad Católica de Chile have a fascinating piece. They point how an old Catholic ritual of circulating small sanctuaries containing a Virgin Mary statuette among households creates its own small economy:

Brazilians are moving away from Catholicism. Today, fewer than 50 percent of Brazilians identify as Roman Catholic, down from 92 percent in 1970. But after 500 years in South America, the Catholic Church remains deeply enmeshed Brazil’s economy and society.

Among its many footholds is a little-known tradition called the Movimento das Capelinhas, or “small chapel movement.” This phenomenon, which takes place in hundreds of cities and towns across Brazil, centers on the circulation among Catholic households of small sanctuaries containing a Virgin Mary statuette.

The Movimento das Capelinhas is an example of a circulation-based collaborative network, a kind of hyper-local economy that is popping up across the globe, from one London district’s alternative currency to the time banks of New Zealand.

Such systems appeal because they exchange a narrow focus on economic value (only money matters) for a broader definition of what has value to people. By circulating dear objects in a certain pattern, these collaborative networks distribute their benefits to all involved, and the “profit” goes well beyond the small economic bump communities may see.

The small chapel movement forms part of a long history of Roman Catholic rituals involving sacred relics and statues sent out to tour the world’s parishes.

Protected by their wooden homes, Brazil’s moving Marys pay one-day “visits” to various parishioners’ homes in a semi-formal process determined by neighbors, parishes and lay volunteers. Most chapel groups include about 30 families, such that each family receives one visit a month. Local clergy oversee the Marys’ progress around town.

In doing their rounds, our research found, these peripatetic chapels do more than just physically circulate – their travels actually create profit and value for participants. The end result is a de facto local Catholic “economy,” one based on shared values rather than money.

Like this:

Prof George Dotsis of University of Athens has a piece on how options were priced in 19th century.He builds his research from a book by an option trader: Higgins, L (1906), The put-and-call, Aberdeen: Aberdeen University Press.

As expected, traders back then had figured a way to price options without much jazz as today: